The guarantor's defense of release under Article 862 of the Civil Code

Legal Insight

April 2025

Marilena Giannika, Trainee Lawyer

Summary: In bank guarantee agreements, guarantors customarily waive the benefit of Article 862 of the Greek Civil Code (defense of release). However, the right to invoke the defense of release remains intact when the creditor's satisfaction of the claim becomes impossible due to gross negligence or willful misconduct by the lender. The guarantor must prove that the subsequent insolvency of the principal debtor is causally linked to omissions or harmful actions by the creditor, namely the bank (e.g., delay in pursuing claims, failure to terminate the contract, or failure to secure collateral).

When examining guarantee agreements executed in commercial transactions, it is readily observed that the overwhelming majority serve to secure banking credit contracts. Due to their highly standardized nature, the prevailing practice in such contracts is the simultaneous waiver by the guarantor of defenses they could otherwise raise against the banking institution, notably but not exclusively:

a) personal defenses of the guarantor,

b) the benefit of discussion (Article 855 CC) — requiring the creditor to first seek satisfaction from the principal debtor,

c) defenses concerning the duration of the guarantee reflected in Articles 866, 867, and 868 CC, and

d) the benefits provided in Articles 862–864 CC.

In essence, upon signing, the guarantor largely forfeits the statutory protections that traditionally differentiate their liability from that of the principal debtor.

- Means of Protection – The Defense of Release (Article 862 CC)

The defense of release constitutes a specific ground for the discharge of a guarantee obligation. It may be invoked by the guarantor when the debt persists, but due to the creditor's behavior, recovery from the principal debtor becomes impossible. A classic example is when a bank neglects to pursue payment from the principal debtor for an extended period, during which the debtor becomes insolvent, and subsequently seeks satisfaction from the guarantor’s assets.

It should be noted that a prior waiver by the guarantor of the defense under Article 862 CC is valid only if the creditor’s inability to recover from the principal debtor resulted from slight negligence. A waiver in cases of gross negligence or willful misconduct by the creditor contravenes Article 332(2) CC and is void under Article 173 CC (see Supreme Court decisions 1216/2019 and 1137/2019).

The burden lies with the guarantor — who is alleged to have waived the 862 CC defense — to assert and prove that the creditor's inability to recover from the principal debtor was due to gross negligence or fraud. This assertion must follow a comprehensive two-stage approach:

• First, the guarantor must establish and prove the principal debtor’s insolvency. Insolvency typically coincides with bankruptcy but can also involve any factual or legal condition precluding the creditor’s satisfaction, such as the absence of assets or valid security. Importantly, the insolvency must have arisen subsequently and not have existed when the debt was originally incurred.

• Second, once the principal debtor’s insolvency is demonstrated, the guarantor must prove misconduct by the creditor that causally contributed to this insolvency. Specifically, it must be shown that earlier recovery was possible because the debtor had sufficient assets at the time, which were later lost, and that the creditor, despite being aware (or grossly negligent in remaining unaware) of the debtor’s worsening financial situation, failed for an extended period to initiate judicial recovery.

In presenting these facts, emphasis must be placed on their chronological sequence:

- The key point of proof is identifying when the bank became aware of the principal debtor’s default.

- Once identified, the debtor’s assets at that time must be detailed, demonstrating their adequacy to satisfy the claim.

- Finally, it must be established when a) the principal debtor became irretrievably insolvent, and b) the bank commenced proceedings against the guarantor.

Following this, the guarantor must highlight the measures the bank failed to take despite having the ability to do so, such as:

i) timely termination of the agreement and account closure (Court of First Instance of Rhodope 84/2024),

ii) registration of security interests over the debtor’s real estate,

iii) issuance of demands for payment, and

iv) general judicial enforcement actions (Court of First Instance of Rhodope 6/2023).

Moreover, failure to file a fraudulent conveyance action to block asset transfers also constitutes negligence (Court of First Instance of Rhodope 97/2023).

The bank’s negligence may also stem from actions beyond debt recovery. For example, courts have recognized as gross negligence the provision of excessive, unchecked additional credit to an already financially distressed debtor, increasing their liabilities beyond their assets (Court of First Instance of Thessaloniki 3661/2014). Another example is the failure to enforce a mortgage despite its existence, instead entering into repeated restructuring agreements with an insolvent debtor, thereby increasing the outstanding debt (Court of First Instance of Piraeus 100/2023).

The Court of Appeal of Athens (decision 2364/2024) also highlighted that even the foreseeability of a debtor’s economic collapse, combined with the creditor’s inaction, constitutes gross negligence.

Conclusion

The protection of guarantors — who, in most real-world scenarios, are individuals with limited knowledge of banking practices and unaware of the full extent of their liability, often guaranteeing loans for friends and relatives — is rather limited. Only mandatory legal provisions serve as barriers to banking practices that equate the liability of principal debtors and guarantors. These provisions must be maximally leveraged, given the absence of a sufficiently robust protective framework for guarantors.